Duncan Donald

Mon, Jun 24

KYLIN TALK | Weekly Markets Update 24.06.19

In UK politics we saw the race for the next Prime Minister narrowed down to just 2 candidates. After internal parliamentary votes, the Conservative party moved forward with Jeremy Hunt and Boris Johnson.

Boris had the considerable majority in the voting process and the polls put it at a 90% chance of him taking over as PM. Despite both candidates having now pledged to take the UK out of the single market by the end of October, should meaningful negotiations not be forthcoming from the EU, the pound remained upbeat finishing the week above 1.2700 against the US Dollar. With Boris Johnson holding such a commanding lead over Hunt, naturally, it seems the competition his to lose and with the negative press over the weekend after an alleged domestic dispute he could do just that. Boris has also historically struggled with public debate and questioning, so naturally, Hunt is calling for televised in an attempt to capture wavering voters in the wider Conservative party.


From a monetary policy perspective, it was also a significant week for the Bank of England’s Monetary Policy Committee as they met to discuss UK interest rates. So far this year the Committee head Mark Carney had been very optimistic on the strength of the UK economy, hinting that had the markets not been hamstrung by Brexit uncertainty they would be hiking interest rates from 0.75%.  However, in his press release after Thursday’s meeting, they naturally announced rates would remain unchanged there was an evident shift in tone with caution more apparent. With the backdrop of Global trade tensions and the Federal Reserve in the US and European Central Bank on the brink of rate cuts, Carney adopted a more dovish approach, also downgrading the UK’s growth outlook as Brexit bites the UK economy. This week UK GDP data for Q1 will give strong evidence of the real health of the UK economy.

In the US attention shifted to the situation in Iran where a US drone was shot down by Iranian forces. This led for Trump to call a launch on Iran only to quickly reverse that decision calling off the strike. With concerns over oil flow heightened this brought a surge of nearly 6% in the oil price in a single day as oil surged on the week.  Iran claimed they have no intention of going to war with the US, but with the volatile nature of US President, Donald Trump at the helm concerns remain.

This week brings the latest G20 where it is expected that leaders from the US and China will finally sit down to discuss a mutually beneficial trade deal. These negotiations have overshadowed markets for months now so progress or lack of will likely cause major volatility. Last Wednesday evening saw the June Federal Reserve Open Market Committee (FOMC) interest rate decision, whilst broad expectation was that rates remain on hold for this month with a possibility of a cut in July, the FOMC led by Jerome Powell firmly underlined the fact that they will in fact cut in July. The tone of the statement raised the question of if they are so sure rates need to be cut, why wait, with the likelihood the FED wished to see the progress made with China at the G20 before committing to rate movement. With a rate cut fully priced in for July now there is a growing expectation that the FOMC may be bolder and cut by 50bps, however, it remains unlikely that the first move in a cycle would be so aggressive.

It would seem that the European Central Bank’s outgoing leader Mario Draghi was evidently frustrated that the markets didn’t react strongly enough to the ECB’s warning over required action at their rate setting statement at the start of the month. Last week he took the opportunity to leave the market in no uncertain terms that a rate cut is scheduled in the very near future plunging the Euro. This move was immediately criticized by Donald Trump as an act to make European goods more competitive.  Whilst the EU seeks to recruit a new leader to succeed the departing Draghi the job is becoming harder by the week, the new leader will have to contend with pressure from the US, Brexit negotiations and of course choosing the right stimulus (rate cuts V Quantitative easing) to kick start ailing Eurozone growth.


The week ahead:

Monday - The week starts with the UK Inflation hearings and German IFO data.

Tuesdays - Eurozone Money supply and private loans data. Throughout the day there will likely be comments from the OPEC committee as they discuss everything Oil related, this will be particularly sensitive in light of the recent conflicts between the US and Iran. In the afternoon we get US Consumer Confidence and new home sales.

Wednesday - The day kicks off with the interest rate decision from the Reserve Bank of New Zealand where its expected rates stay on hold at 1.5%. In the UK there is lending data and inflation hearing reports in the am before US Durable goods orders in the afternoon session.

Thursday - Business confidence data from New Zealand is first up before German and Spanish inflation data.  In the US session, we get US GDP with the quarter on quarter number expects to remain at 3.1%.

Friday - As the G20 kicks off all eyes will be on Trump and Xi talking trade. In the UK we get GDP numbers with the quarter on quarter number expected at 0.5% as well as current account numbers. In midmorning, we get Eurozone Inflation numbers before Canadian GDP and US Personal spending data, then finally PMI data and Consumer Sentiment and Inflation Expectation data.